Self-regulation of online gaming will need safeguards

Self-regulation of online gaming will need safeguards

The gaming sector has grown into a whopping $2.6 billion industry in India, with an estimated count of more than half a billion gamers being served by over 900 companies.

Authors: Rohit Kumar and Deepro Guha
Published: March 14, 2023 in Livemint

Video games are bad for you? That’s what they said about rock and roll!” So noted Shigeru Miyamoto, an accomplished video-game designer. It’s a human trait: We take time to warm up to what’s new and unfamiliar. What was once true of rock music may be true of online gaming today.

The gaming sector has grown into a whopping $2.6 billion industry in India, with an estimated count of more than half a billion gamers being served by over 900 companies. But the history of online gaming in India has been riddled with regulatory confusion, with gaming often dismissed as gambling. In their battle for legitimacy, developers have been knocking on multiple doors in the central government and in Indian states, asking for a uniform regulatory framework and a clear definition of what is legal (games of skill) and what’s not (games of chance).

The debate between ‘skill’ and ‘chance’ is still far from settled, but the central government has recently taken a step to offer some form of recognition through a set of draft amendments to the IT Rules. And while there is disagreement over whether this is the right form of legislative intervention, there is also palpable relief within the gaming community to see a regulatory framework finally take shape. From the industry’s point of view, not only will this help mitigate uncertainty, it can also address emerging concerns of financial fraud, money laundering, user addiction and harm, all of which need urgent attention.

The draft rules adopt a light-touch approach to regulation and provide for industry-created Self-Regulatory Bodies (SRBs) that would be responsible for registering online games and developing a framework for user protection. While the proposed self-regulatory structure is promising, ensuring the independence of SRBs would be central to its efficacy and success.

The framework provides for multiple SRBs to be set up, and an entity keen to offer a game must first become a member of an SRB and then register the game before being able to offer it to users. The registration is meant to signal legitimacy to users to help weed out bad actors, including offshore betting and gambling entities. Although thoughtful and geared towards consumer protection, this approach can also backfire.

Requiring all games to be registered and approved by SRBs before launch gives these entities the power to deny market entry on grounds that include several subjective criteria like conformity with interests of sovereignty and integrity of India, security of the state, conformity with gambling and betting laws (which have differing interpretations across states), etc. Not only can this be misused to create entry barriers for young startups and innovative disruptors, it can also lead to variance in decisions across SRBs. Even if an entity were to approach another SRB on denial of registration, an elongated process is likely to increase launch costs and delay speed-to-market, thereby reducing overall competition in the gaming ecosystem.

To ensure independence of SRBs, the registration conditions also call for provisions in the SRB’s Articles of Association to ensure independent functioning that is “at arm’s length from its member online gaming intermediaries”. However, there isn’t a lot of Indian jurisprudence to bank on, especially with respect to the term “arm’s length” in the context of self-regulatory bodies and their members.

Given that the efficacy of the government’s proposal hinges on the robustness of the self-regulatory architecture, it is critical to safeguard against risks associated with regulatory capture by interest groups. Therefore, what powers are delegated to SRBs and how they are designed and structured becomes important.

One way to reduce risk would be to adopt a tiered approach to registration, by requiring initial registration only for the gaming entity (rather than the game) based on a narrow list of predefined objective criteria. This could be done by surveying registration documents, promoter background, tax records and other such data points to check if the entity that is planning to offer the game is legitimate and has been operating with a clean track record, without assessing any specific game that the entity plans to offer.

Post-registration, the gaming entity could be allowed to directly offer its games to customers until a game crosses a specified threshold. Once an online game hits a predefined threshold—defined using metrics like the number of active users, gross transaction value, etc—the SRB could be required to register and approve the game separately. This approach would ensure agility of the overall gaming ecosystem while also protecting consumers.

To ensure the independence of SRBs, the government could also consider publishing guidelines outlining “arm’s length” and prescribing minimum dos and don’ts to establish a common baseline for all SRBs. Finally, to increase accountability, the rules could also provide that all SRB decisions be reasoned and in writing, with a right to appeal to a court of competent jurisdiction.

The proposed industry-led light-touch approach to online gaming regulation is indeed progressive. As the government prepares to revise and notify the draft rules, it’ll be good to bolster the regulatory framework with stronger checks and balances. This would create a more responsive ecosystem that not only caters to the needs of the fast-growing online gaming sector, but also protects consumers and spurs innovation, while expediting India’s journey towards a $1 trillion digital economy.